TACTICAL ASSET ALLOCATION COMMITTEE MONTHLY COMMENTARY
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1 APRIL 2019 In March, investor sentiment was dominated by headlines surrounding cooling global growth, ongoing US-China trade negotiations, and cautious undertones from major central banks. Equity markets welcomed some encouraging signs of progress towards a trade deal and the dovish pivot from major central banks which boosted risk appetite and saw global equity markets cap their best quarterly gain in a decade. However, bond investors were in panicmode after yield curves flattened (and in some cases, inverted) during the month, which prompted recession fears and sent nervous investors fleeing to government bonds as a refuge. EQUITY MARKETS FINANCIAL MARKET DASHBOARD MAR MAR. YTD 1 YEAR % PRICE CHANGE (LC) S&P % 13.07% 7.33% S&P/TSX % 12.42% 4.78% MSCI EAFE % 9.04% -6.33% MSCI EM % 9.56% -9.51% FIXED INCOME (%) BASIS POINT CHANGE US 10 Year Bond Yield US 2 Year Bond Yield CA 10 Year Bond Yield CA 2 Year Bond Yield CURRENCIES % PRICE CHANGE CAD/USD % 2.17% -3.49% EUR/USD % -2.17% -8.80% USD/JPY % 1.07% 4.16% COMMODITIES % PRICE CHANGE WTI Oil (USD/bbl) % 32.44% -7.39% Copper (USD/pound) % 11.59% -2.96% Gold (USD/oz) % 0.91% -2.25% Global equity markets extended their 2019 gains in March. The upswing was widespread across the globe, with US equity markets leading the charge and displaying some remarkable upward momentum. Of note, the S&P 500 is now sitting just 3% below its September highs, while Canadian, international, and emerging market bourses also thrived in the environment of improved risk appetite. Interestingly, gains were predominately a result of multiple expansion as headline risks pertaining to global trade receded and as the dovish-turn from central banks improved the visibility of the cycle which when taken together saw investors increase what they were willing to pay for equities. Meanwhile, earnings detracted as ongoing concerns regarding the health of the global economy saw analysts revise down their forecasts during the first quarter. Fixed income markets also posted positive results. Yield curves flattened, with bond yields collapsing relentlessly across the curve. North American 10-year yields slipped back to 2017 levels, while German bonds are sporting negative yields for the first time since And at the short-end, yields were pressured lower after the Federal Reserve signalled it would remain sidelined through 2019 with similar rhetoric from the likes of the Bank of Canada, European Central Bank and the Bank of Japan. As a result, markets are now fully discounting two fed funds rate cuts by the end of 2020 and one full rate cut from the Bank of Canada in The greenback strengthened even as the Federal Reserve adopted an increasingly dovish approach, with nervous investors seeking refuge in the safe haven currency. Conversely, the Canadian dollar slumped even in the wake of higher crude prices and the dovish pivot from the Fed. Instead, the loonie came under pressure after investors slashed their wagers for Bank of Canada rate hikes. Similarly, the euro declined after softer-than-expected economic results saw the European Central Bank push the timing for its first rate hike to Finally in commodity markets, oil broke above the $60 threshold for the first time since November as OPEC+ adhered to pledged production cuts and as supply disruptions in Venezuela and Iran helped to overshadow the cloudy demand backdrop. In contrast, gold lost some ground and tumbled lower as the stronger dollar prompted some aggressive selling late in the month, while renewed optimism on the potential for a US-China trade deal reduced the allure of bullion as a safe haven. PW 1
2 Canada Exports (MoM) Canada GDP (MoM) The Canadian economy got off to a decent start in Output grew by 0.3% in January, with broad-based gains reported across the economy. Gains were led by a resurgence in manufacturing and construction, while oil-sands extraction declined amid mandatory output curbs in Alberta. Meanwhile, exports rebounded 2.9% thanks to a 37% increase in the value of oil shipments, while non-energy exports also jumped 1.2% CANADA The Canadian economy hit a soft patch and stalled-out in late However, the economy got off to a strong start in early 2019 and posted its largest output gain in eight months, allaying fears of a prolonged economic downturn. Indeed there are reasons for optimism that the economy will reaccelerate in the coming quarters. Job trends have been stellar and have been tilted towards privatesector and full-time positions, while the impressive comeback in crude prices (and narrowing differentials on Western Canadian crude) should also lend support. Furthermore, temporary weakness in the energy sector is likely to reverse course as oil production returns following mandated cuts, while further clarity on the trade front and a healthy US demand backdrop are expected to entice a revival in investment and export activity Average Hourly Earnings (YoY) ISM Manufacturing Index While the US economic trajectory has indeed softened, prospects for both the consumer and factory sectors remain favourable and should reinvigorate the economy throughout Average hourly earnings rose 3.4% y/y in February, marking the fastest pace in a decade and a boon for consumption. Meanwhile, the March ISM manufacturing gauge ticked higher in a sign of ongoing resilience in the US factory sector USA The pace of US growth moderated in early-2019 as the economy contends with noise related to the government shutdown, weatherrelated disruptions, and other seasonal factors. However, the US economy appears ripe for a rebound this spring. The US consumer remains a pivotal source of strength, with a healthy labour market, accelerating wages, and low interest rates boosting sentiment and inevitably, consumer spending prospects. Furthermore, the manufacturing sector has improved according to the latest ISM survey results, with rebounds in both new orders and production suggesting that factory activity remains robust. Taken together, above-trend growth should help to place upward pressure on prices which should put Federal Reserve rate hikes back on the table in late 2019 should financial and economic vulnerabilities dissipate. INTERNATIONAL China Non-Manufacturing PMI China Manufacturing PMI We are seeing some preliminary signs that the monetary and fiscal impulse from Chinese policymakers may finally be proving successful in stabilizing the economy with positive implications for global growth in general. The manufacturing purchasing managers index (PMI) defied expectations and jumped out of contraction territory in March, while the non-manufacturing gauge also surprised to the upside and ticked higher Chinese policymakers have responded to the erratic macro backdrop with a plethora of stimulus measures that include tax cuts for businesses and consumers, infrastructure spending, and lower reserve requirements for banks. In response, we are seeing some tentative signs of stabilization. According to the latest PMI survey results, the Chinese economy rebounded in a sign that past stimulus measures may finally bearing some fruit with both the factory and services sectors back in expansion territory. And while stagnating growth in the Eurozone prompted the ECB to tweak its policy trajectory in March, the latest rebound in German retail sales and auto production suggests that temporary factors that weighed on the European locomotive last year may be receding, while forwardlooking gauges of economic health have also improved. 2 APRIL 2019
3 MAIN SCENARIO SYNCHRONIZED GLOBAL EXPANSION PROBABILITY 40% The global economy finds a bottom and reaccelerates in a synchronous manner, with all major regions contributing to the advance. The US leads the global charge, though moderates to a still above-trend pace as the fiscal and monetary impetus fades in 2019, which has positive spillover effects for the Canadian economy. Looking abroad, transitory factors that were met with global trade tensions recede and the European and Japanese economies recalibrate, while the Chinese economy stabilizes in response to the plethora of monetary and fiscal stimulus measures that place a floor under the world s second largest economy and by extension, global growth prospects. Taken together, the combination above-trend global growth and a revival in commodity prices should bolster inflation expectations and send major central banks back to the table in late This optimistic, growth-levered scenario bodes well for equities and commodities (ex-gold) at the expense of fixed income and the US dollar. SCENARIO 2 MODERATE GROWTH PROBABILITY 25% In this alternate scenario, the global economy fails to reaccelerate in a meaningful way, but nonetheless continues to grow in-line with (or modestly below) its potential rate. The environment of moderate and self-sustaining growth keeps inflation stable at levels that do not pose a threat to the economic trajectory, allowing major central banks to maintain stimulative policies and remain sidelined throughout 2019 creating a lucrative, not-too-hot, not-too-cold backdrop for both the economy and investors alike. The accommodative impulse from major central banks ultimately nurtures the economic recovery and extends the visibility of the cycle. This reflationary backdrop also bodes well for equities and commodities (ex-gold) at the expense of fixed income and the US dollar though to a lesser magnitude than our base case scenario. SCENARIO 3 POLITICAL INSTABILITY PROBABILITY 20% The trend towards populism and protectionism could ignite a crisis in confidence and destabilize the financial markets. The biggest risk to our base case scenario is a rise in protectionism stemming from the US and the threat of a trade war that would derail the synchronous global expansion. While the US has proven successful in securing a trade deal with Canada and Mexico and extracting some concessions from China, tensions remain due to the sizeable trade deficit in the US. As such, Trump s focus may shift towards other trading partners in Europe and Japan, with the US threatening to use Section 232 (national security grounds) to impose tariffs on auto imports, while tensions between the US and China are surely to prevail. Taken together, any escalation in the trade debacle would be detrimental for trade flows and hence, the global economy. Meanwhile, the stakes are high for this year s European Parliamentary elections where the populists are likely to continue gaining ground, while lingering tensions and a lack of progress in Brexit negotiations raises the odds of a hard Brexit scenario. SCENARIO 4 STAGFLATION PROBABILITY 15% After an extended period of undershooting central bank inflation targets, policymakers tolerate higher inflation (overshoot) and monetize inflation. As a result, inflation expectations start to de-anchor from current subdued levels and surge higher. This would come at the same time that fiscal stimulus is being reigned-in (2020) in the later stages of the economic expansion, causing growth to moderate to well below potential levels in response. In the Stagflation scenario, a stagnation in growth occurs concurrently with an acceleration in inflation as a result of previous excessive monetary stimulation and an exhaustion of productive capacity - creating a tumultuous financial market landscape whereby both equities and bonds experience broad based declines. 3 APRIL 2019
4 FORECASTS FOR THE NEXT 12 MONTHS SCENARIOS MARCH 29, 2019 SYNCHRONIZED GLOBAL EXPANSION MODERATE GROWTH POLITICAL INSTABILITY STAGFLATION PROBABILITY 40% 25% 20% 15% GDP GROWTH (Y/Y) Global 3.70% 3.80% 3.50% 2.00% 2.75% Canada 1.60% 2.50% 1.50% 0.50% 2.75% U.S. 3.00% 3.00% 2.50% 1.00% 2.75% INFLATION (HEADLINE Y/Y) Canada 1.50% 2.50% 1.50% 1.50% 3.00% U.S. 1.50% 2.50% 1.75% 2.00% 3.00% SHORT-TERM RATES Bank of Canada 1.75% 2.25% 1.75% 1.25% 2.00% Federal Reserve 2.50% 3.00% 2.50% 2.00% 2.75% 10-YEAR RATES Canada Government 1.62% 2.60% 2.25% 1.40% 3.00% US Government 2.41% 3.20% 3.00% 2.25% 4.00% PROFIT GROWTH (12 MONTHS FORWARD) Canada 4.4% 12.9% 5.6% -11.6% 8.0% U.S. 6.0% 9.6% 4.6% -7.7% -1.5% EAFE 6.3% 10.6% -3.1% -8.5% -8.5% EM 7.8% 16.8% 2.1% -20.1% -5.3% P/E (FORWARD 12 MONTHS) Canada 15.1X 15.0X 15.5X 14.0X 13.0X U.S. 16.5X 16.5X 17.0X 15.0X 16.0X EAFE 13.5X 14.0X 15.5X 12.0X 13.5X EM 12.1X 13.0X 13.5X 11.0X 11.5X CURRENCIES CAD/USD EUR/USD USD/JPY COMMODITIES Oil (WTI, USD/barrel) APRIL 2019
5 MATRIX OF EXPECTED RETURNS SCENARIOS SYNCHRONIZED GLOBAL EXPANSION MODERATE GROWTH POLITICAL INSTABILITY STAGFLATION PROBABILITY 40% 25% 20% 15% TRADITIONAL INCOME (BONDS) -2.1% -0.3% 4.2% -4.6% Money Market 2.0% 1.8% 1.5% 1.9% Canadian Bonds -3.1% -0.8% 4.9% -6.2% NON-TRADITIONAL INCOME 7.0% 7.0% 5.0% 3.0% TRADITIONAL CAPITAL APPRECIATION (STOCKS) 4.4% 2.0% -20.1% -16.0% Canadian Equity 7.1% 3.5% -21.7% -11.2% U.S. Equity -1.7% -0.8% -15.1% -15.4% International Equity 2.6% 2.1% -17.8% -19.1% Emerging Market Equity 10.7% 3.0% -27.7% -21.6% NON-TRADITIONAL CAPITAL APPRECIATION 7.0% 7.0% 5.5% 5.0% CURRENT STRATEGY 1 MINIMUM BENCHMARK MAXIMUM STRATEGY ALLOCATION RELATIVE TRADITIONAL INCOME (BONDS) 10.0% 30.0% 50.0% Underweight 10.0% -20.0% Money Market 0.0% 5.0% 40.0% Neutral 5.0% +0.0% Canadian Bonds 0.0% 25.0% 50.0% Underweight 5.0% -20.0% NON-TRADITIONAL INCOME 0.0% 20.0% 40.0% Overweight 30.5% +10.5% TRADITIONAL CAPITAL APPRECIATION (STOCKS) 10.0% 30.0% 50.0% Overweight 32.5% +2.5% Canadian Equity 5.0% 10.0% 30.0% Overweight 13.5% +3.5% U.S. Equity 0.0% 7.5% 25.0% Underweight 2.5% -5.0% International Equity 0.0% 7.5% 25.0% Underweight 2.5% -5.0% Emerging Markets Equity 0.0% 5.0% 15.0% Overweight 14.0% +9.0% NON-TRADITIONAL CAPITAL APPRECIATION 0.0% 20.0% 40.0% Overweight 27.0% +7.0% 1 Based on a 100 basis point value added objective. The benchmark employed here is based on a model portfolio and for illustrative purposes only. Individual client benchmarks are employed in the management of their respective portfolios. 5 APRIL 2019
6 EVOLUTION OF STRATEGY 1 TRADITIONAL INCOME (BONDS) NON-TRADITIONAL INCOME TRADITIONAL CAPITAL APPRECIATION (STOCKS) NON-TRADITIONAL CAPITAL APPRECIATION January 9, % 0% -16% +20% February 29, % 0% -20% +20% September 19, % 0% -10% +20% June 8, % 0% -16% +20% December 9, % +12% -16% +20% May 6, % +10% -8% +18% December 13, % +4% 0% +16% August 10, % +4% +5% +11% November 11, % +4% -5% +11% April 20, % +9% 0% +11% July 31, % +14% -5% +11% November 9, % +14% +2% +4% February 19, % +13% +5% +2% December 3, % +20% 0% 0% April 1, % +20% +10% -10% November 14, % +20% +5% -5% July 13, % +5% +10% +5% October 19, % +0% +15% +5% June 24, % +0% +8% +5% July 12, % +0% +13% +7% July 27, % +5% +8% +7% March 17, % +13% 0% +7% October 9, % +13% 0% +7% December 17, % +10.5% +2.5% +7% 1 Based on a 100 basis point value added objective. 6 APRIL 2019
7 CONTACT US fieracapital.com NORTH AMERICA Montreal 1501 McGill College Avenue Suite 800 Montreal, Quebec H3A 3M8 T Toronto 1 Adelaide Street East Suite 600 Toronto, Ontario M5C 2V9 T Calgary 607 8th Avenue SW Suite 300 Calgary, Alberta T2P 0A7 T Vancouver 1040 West Georgia Street Suite 520 Vancouver, British Columbia V6E 4H1 T New York Fiera Capital Inc. 375 Park Avenue 8th Floor New York, New York T Boston Fiera Capital Inc. 60 State Street 22nd Floor Boston, Massachusetts T Dayton Fiera Capital Inc Innovation Drive Suite 120 Dayton, Ohio T Los Angeles Bel Air Investment Advisors 1999 Avenue of the Stars Suite 3200 Los Angeles, California T EUROPE ASIA London Fiera Capital (UK) Limited 39 St James s Street London, United Kingdom SW1A 1JD T Frankfurt Fiera Capital (UK) Limited Walther-von-Cronberg-Platz 13 Frankfurt, Germany T Hong Kong Clearwater Capital Partners Suite 3205 No. 9 Queen s Road Central Hong Kong T Singapore Clearwater Capital Partners 6 Temasek Boulevard #38-03 Suntec Tower 4 Singapore This document is intended only to provide general information and is not intended to be and should not be construed or relied upon as legal or other profes sional advice. assumes no liability by providing this guidance to its clients or any other person or entity. The information provided herein may or may not apply in any particular situation. Users should carefully review the guidance included here to determine applicability. The information and opinions herein are provided for informational purposes only and are subject to change. The information provided herein does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. Performance figures pertaining to composites are aggregations of the performance of one or more client portfolios or pooled funds that represent similar investment strategies. Further information on the investment strategy of composites and pooled funds managed by or its affiliates can be found at All performance data is time weighted and assumes reinvestment of all distributions or dividends and does not take into account other charges or income taxes payable that would have reduced returns. Valuations and returns are computed and stated in Canadian dollars, unless otherwise noted. Past performance is no guarantee of future results and other calculation methods may produce different results. Individual account or fund performance will vary. Information pertaining to Fiera pooled funds is not to be construed as a public offering of securities in any jurisdictions of Canada. The offering of units of Fiera pooled funds is made pursuant to the funds respective trust agreements and only to those investors in jurisdictions of Canada who meet certain eligibility or minimum purchase requirements. Important information about Fiera pooled funds, including a statement of the fund s investment objective, is contained in their trust agreements, a copy of which may be obtained from. Unit values and investment returns will fluctuate. Please read the trust agreement of the pooled funds before investing. Pooled funds are not guaranteed, their values change frequently and past performance may not be repeated. 1 Legal Notice to U.S. Persons: ( Fiera Capital ) does not provide investment advisory services, or offer investment funds, in the United States or to U.S. persons. Investment advisory services for U.S. persons are provided by Fiera Capital s U.S. affiliates (the U.S. Advisers ). Any investment advisory services of Fiera Capital provided to U.S. persons are (or were) provided by the U.S. Advisers, in each case pursuant to a participating affiliate arrangement with Fiera Capital in accordance with applicable guidance of the staff of the U.S. Securities and Exchange Commission (the SEC ). The U.S. Advisers are SEC-registered investment advisers. Unless otherwise indicated, all dollar figures are expressed in Canadian dollars. 2 is not authorized to conduct regulated activities in the United Kingdom and any such activities are only conducted by Charlemagne Capital (UK) Limited, a wholly owned subsidiary of. is not authorized to conduct regulated activities in the Isle of Man and any such activities are only conducted by Charlemagne Capital (IOM) Limited, a wholly owned subsidiary of. is not authorized to conduct regulated activities in Germany. Charlemagne Capital (UK) Limited, a wholly owned subsidiary of, maintains a branch office which is registered with the regulator in Germany
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